What are Assets?

Definition: An asset is a resource that has some economic value to a company and can be used in a current or future period to generate revenues.

These resources take many forms from cash to buildings and are recorded on the balance sheet until they are used. Once these resources are used or spent, they are transferred from the balance sheet to the income statement and called expenditures.

Here are some of the most common examples.

Current

Cash and Equivalents

Accounts Receivable

Inventory

Still asking yourself, what is an asset? Let’s look at each with an example of a business formation because a company can acquire its resources in a number of different ways.

Examples

Vicky and Scott are planning to setup a factory which will deal in production works of sports product. When a company commences, it usually is out of resources. Therefore, Vicky and Scott will have to invest personally on equipments to get the company into working stage. This initial investment is termed as owner’s equity. Both Vicky and Scott contribute a piece of machinery to the new company.

Once the machinery is introduced to business, it can be used to generate income. When the parts of machinery is sold, it brings in cash. As the business welcomes more jobs, Vicky and Scott start to use their profits to purchase more machinery to satisfy increasing orders.

Vicky and Scott produce goods round the year exapnding the business until they are out of sapce at their exisitng location. They go on to look for another building, but they don’t have sufficient funds to purchase it with the cash they have in total, so they go for a loan. The bank lends enough capital to purchase a building where they can continue their operations.

In the example above, we got to see three different ways assets were acquired. First, by the owner’s contribution. Second, by selling the pre-owned assets to bring in more assets when it bought additional equipment with its cash. Third, the company took out a loan to purchase a building.

It’s important to note that it is mentioned nowhere that if the company owns a particular resource, then only it can be known as an asset. Remember the asset definition, it’s a resource that the company has control of and can use to generate revenues. Many businesses have loans, notes, and leases on equipment that either directly or indirectly eliminates their true ownership of the resources, but they still have control of it.